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Evaluation of managers for incentive compensation

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Reference no: EM13504235


Cars motor cycles scooters suvs TOTAL






Sales                                         1,000.00          1,200.00       1,500.00    3,000.00    6,700.00
Unit level costs                                             280.00              375.00           490.00    1,420.00    2,565.00
Batch level costs                                             200.00              320.00           410.00       590.00    1,520.00
Division specific  capacity related costs                                             100.00              150.00           180.00       350.00       780.00
Divisional income                                             420.00              355.00           420.00       640.00    1,835.00
Allocation of corporate charges                                             234.00              281.00           351.00       703.00    1,569.00
Final  Divisional  net income                                             186.00                74.00             69.00 -       63.00       266.00












part a




Assumption : Allocation of Corporate charges is considered as Fixed Cost




Cars motor cycles scooters suvs TOTAL






Sales                                         1,000.00          1,200.00       1,500.00
   3,700.00
Unit level costs                                             280.00              375.00           490.00
   1,145.00
Batch level costs                                             200.00              320.00           410.00
      930.00
Division specific  capacity related costs                                             100.00              150.00           180.00
      430.00
Divisional income                                             420.00              355.00           420.00                 -      1,195.00
Allocation of corporate charges                                             424.32              509.19           636.49                 -      1,570.00
Final  Divisional  net income -                                               4.32 -           154.19 -        216.49                 -   -     375.00






%  to Sales 27% 32% 41%
           1.00

The managers of each division are evaluated on their divisional net income which includes an allocation of corporate charges.

Corporate charges are allocated to each division based on relative sales. Each division is paid a yearly bonus on their final divisiional net income

If the final divisional income for a division exceeds 10% of sales they receive a percentage of the bonus pool.

The company is considering discontinuing the SUV line due to continuous operating losses over the last five years.

a) discuss whther discontiuniuing the perfume line will improve profitability. What other factors need to be considered before this decision is made.

b) discuss the appropriateness of using final divisional net income as the basis for bonus compensation. Should corporate charges be included in evaluating a divisons performance.

c) recommend changes to evaluation of managers for incentive compensation

Reference no: EM13504235

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